He's back. And this time, the forces of light and goodness will prevail, right?

And now, Soylent Green Is People

(And my cartoons. None of the artwork in this post or any other is mine, and some of the cartoons are direct reproductions. My “cartooning” is limited to some limited photoshop work and the use of additional text generally in Comic Sans font.).

The Bankers Circle Of Life – principal reduction programs and unintended consequences.

Soylent Green Is People — April 7, 2011

Banks have had it good for the past couple of years. They’ve feasted on taxpayer subsidized capital, allowed accounting tricks to book phantom profits, and transferred privately created risk to the public’s balance sheet with nary a whisper of protest. Many responsible home owners continue to enriched said same bankers by paying mortgages that can never be refinanced into today’s lower rates. By owing more than the present value of their property, many home owners are trapped in a cycle that often ends in financial ruin.

The final insult to those who chose to live up to their promise to repay instead of living large through leverage will soon be here. How do I know this to be true? Since Irvine lives in the shadow of the House of Mouse, I thought it best to re-tell a family favorite to help illustrate how we got here, and what our inescapable future might look like.

In 2003 homeowners from far and wide came to see what special thing NAr-Fiki was revealing to the people of the USALands. Holding for all to see as an example of our bright future was Home Ownership, the offspring of King Conforming.

As Home Ownership grew older, King Conforming took him up to the highest point of the land – Peak Equity – and showed him a bountiful future. “Someday you’ll be a part of the Circle of Life. You’ll buy a home, pay off the loan, have plenty of equity to share with your children, and eventually see them become a home owner just like you.” That’s how it’s supposed to work out.

Unfortunately things began to go the wrong way in the USALands. Bankers ran out of loan programs that allowed greater fools to purchase homes at ever inflated prices. People began to panic. A mad rush to the exit began.

Home prices fell, crushing King Conforming. The only Big Cat left alive after the stampede was Home Ownership’s mean old Uncle “Sam” and the banker cartel.

During the Great Recession, Uncle Sam and his minions pushed Home Ownership out of the USALands. Jobs were few and far between. Prices were tunneling their way to the center of the earth. Only a few places seemed hospitable to relocate to. Eventually Home Ownership found the OC Oasis, a land flowing with milk an honey. There he made a few friends – the chatty Rodent and a well fed Pig. Home Ownership marveled at the lifestyles Rodent and Pig had – swimming pools with waterfalls, eating out more than in every night. How could they pay for their life of luxury? “Home Equity Ponzia” said Rodent. “It’s a wonderful thing”. Home Equity Ponzia, ain’t no crying shame”. “It means “No Worries” exclaimed Pig. Home Ownership was a little unsure of what all this meant and so didn’t dive in to debt along with his new neighbors.

As time went on life in the OC Oasis wasn’t going as planned. He wasn’t fully employed, things were getting a bit tight financially. In a vision one night King Conforming appeared telling Home Ownership that since he paid his house loan on time, certainly there were programs available that might make things easier, but they could only be obtained by going back to the land that Uncle Sam ruled. Even old NAr-Fiki came by, reminding Home Ownership that strategic default was a shameful, bad thing.

Home Ownership asked Uncle Sam to force his minions to let up on his loan terms, but to no avail. “Change?” asked Uncle Sam… “What is this hopey change you speak of? My banker cartel can’t profit from changing your loan terms so why would we do it?” Home Owner tried down to the last ounce of his strength and legal capacity to wrest control of his financial future from the bankers clutches but alas, it wasn’t to be.

Home Ownership was surprised to see his friends Rodent and Pig sitting next to Uncle Sam. ” Whatever remains after my bankers are done with you”, sneered Uncle Sam, “will be given to these two”. “Hey”, Rodent and Pig sang in unison, “We’ve got to maintain our lifestyle somehow. HomeEquity Ponzia!” Uncle Sam’s last words to the cornered Home Owner were chilling – “That’s how the Circle of Life really is, baby!”

And so the bankers devoured Home Ownership. The End.

Hey, I didn’t say the story would had a happy ending. This isn’t some friggin’ fairy tale.

Principal reduction plans are coming to USALands. Uncle Sam and his banker minions have several programs in place to get this started.

We’ll focus in this post on what may become the biggest, baddest one of all, but first:

The Why Question.

Why are bankers going to reduce principal? What benefit might there be for them? The answer to this question is fundamental in understanding the reason for these programs. Like any complex story, it’s best told when the details are simplified. The following is a close approximation of why PA loans will start in earnest, but not a scenario that fits all circumstances. Also, we’re going to use a few assumed names along the way for copyright avoidance illustration purposes.

In 2008 Bank of Albania (BA) was given incentives by the Government to absorb the assets of the troubled mortgage lender Capital Wagon (CW), one of many marriages of convenience during those days. Venture capitalists also began to purchase from the FDIC mortgage debt from other failed banks over the past few years. Thecompanies essentially paid a net price of .20 cents on the dollar or less for these troubled mortgage assets. Some assets turned in to REO’s, some loans were modified to keep the regulators and Congress at bay, but a vast number of these loans are simply not performing, threatening to swamp the survivor institutions balance sheets.

HUD created several programs to help facilitate mortgage relief for income distressed home owners, but it is the FHA Short Refinance / Negative Equity program that will be used to cycle the remaining private non-performing loans into taxpayer guaranteed debt.

Aren't they all bad banks?

Banks like BA will create a “bad bank” (BBA) – a place to dump off load their CW legacy assets at perhaps .40 cents on the dollar. That’s a nice profitable return (since their cost basis was .20 COTD) that BA conceivably could use to declare itself a “Well Capitalized” bank again.

BBA will now contact the home owners and offer them an FHA Short Pay refinance. Imagine a home owner getting a call from their loan servicer that goes something like this:

BBA – Hi, is this Mr. Refi Rodent?

RR – Yes it is.

BBA – I see you owe us $500,000 on a Stated Income 5/1 ARM.

RR – You mean the loan I’ve not made the $2,700 payment on for the last two years, The one with a rate of 3.2%?

BBA – Certainly! Here’s what I’d like to offer you. We see that home values in your area are now at $350,000. What if we cut your principal balance by $175,000 down to $325,000 and give you a 6.0% 30 year fixed loan. The payment would be $2,260. You owe less, your payment is reduced by $440, and all we ask is that you re-start to pay your loan for the next 60 days while we process this principal reduction. Deal?

RR – Frak YAH!

So in a few quick months BBA has turned a non-performing, un-sellable $500,000 loan (that cost them $200,000 when “purchased” from BA) into a shiny new easily re-sellable recourse FHA loan at $325,000 which you and I now are on the hook for as a taxpayer. My guess then is that BBA will in turn sell the loan back to BA at .80 cents on the dollar ($260,000) which makes the “Bad Bank” look like a pretty savvy operator. BA now has a 6.0% rate loan on their books which cost them originally around $100,000. The Bankers Circle of Life!

Remember this important factoid: The banks paid the market value of these loans or $100,000. The borrower is paying on the contractual value, or $500,000. When an FHA Short Pay refinance is transacted, the home owner is not getting a reduction in principal equal to the value of the loan, according to the bank’s valuation of the asset. The home owner is actually increasing the amount of their debt from the $100,000 assumed value to $325,000 present value based on current home prices. What happens tomorrow if the value of homes drops by another 20%? That’s the FHA Short Refinance borrowers Circle of Life. Their best course may be to again stop paying their loan. Rescue came to them once before. Whose to say it won’t happen again?

Some loan service companies offering these negative equity refinances will add a 5 year clawback provision. If there is a principal reduction of $100,000 and you sell at a higher price than current value, the home owner will have to give up the gain. After 5 years pass the feature sunsets. I’d be happy to wait 60 months before pulling the rip cord and bailing out if it meant I could sell for a gain, wouldn’t you?

Additional issues.

The borrowers who will have these offers made to them are those who took out Alternative Financing (ALT-A) or other now toxic portfolio loans, not traditional FNMA Agency 30 fixed rates. The Government created the Home Affordable Refinance Program (HARP) for those mortgages. These loans simply had the rate and not the principal balances reduced. Loan to Values under HARP were capped at 125% which does not help you if you purchased in parts of the Inland Empire or pretty much anywhere in Kern County. You’re stuck with the loan balance and the rate from 2006 unless you strategically default. Thanks for playing.

As principal reductions begin to spread, the social consequences will be catastrophic. When your neighbor comes over to share their excitement about their BA loan balance reduced by 35%, what will BA’s response be when you phone to get the same deal? That call will go something like this:

Responsible Home Owner: Hi, I’ve got a $417,000 30 year fixed loan that I didn’t refinance. My rate is 6.0% but values are such that I cannot fit within the HARP guidelines. The neighbor across the street just refinanced with you and got a lower balance. I’d like to do the same thing.

BA – I see that your loan is owned by Fannie Mae. Take it up with them.

Responsible Home Owner – But you made the loan, you take the payments, and you just refinanced someone I can see from my living room window lounging in his back yard pool. What’s the deal?

BA – I’m sorry, We actually bought this loan from another bank that wasn’t us even though we did have the loan originally. Besides only special cases can use this program. Would you like to open a new CD account with us? Our new rates are .00011013 percent for 60 month!

Responsible Home Owner – FFFFFRRRAAAACKKK YOOOOOOO!

Why should Responsible Home Owner continue to make their house payment at that point? Is it made out of guilt, obligation, or shame? To be honest, I’d have real doubts why I should fork over good money after bad if my neighbors got a consequence free haircut on their loan balance.

What now happens to property values? Well for one lets say values remain flat. The FHA Short Pay home owner decide to put their home on the market at the same time you do. Their sale will be an “Equity Sale” at a market price. Yours will be a Short Sale that might not close. If values fall further, their home will might also be a Short Sale, perhaps even an assumed FHA loan. Yours will likely become an REO. If values increase, you might eek out a slight profit and rent from there on out. Their gain will go towards the purchase of a better home in a nicer neighborhood.

In a world where principal forgiveness, unevenly and inequitably applied, becomes normative, the responsible will end up as waste byproduct in the Bankers Circle of Life. You can’t fight the coming principal reduction wave. It’s reach will stretch not just through the financial world, but down to the very streets we live on. It’s simply the amplified end point of a national policy of that enforces zero consequences for any actions.

Hakuna Matata er… HomeEquity Ponzia to all.

Soylent Green Is People.

It's the Circle of Life

And it moves us all

Through despair and hope

Through faith and love

Till we find our place

On the path unwinding

In the Circle

The Circle of Life

The Lion King — The Circle of Life

Some short sales aren't really for sale?

Today's featured property has been on the MLS for over three years. When a property is on the market for nearly 1,111 days, is it really for sale? Either the price is too high, or other conditions are preventing a sale from taking place which effectively remove it from the listing pool.

I write often about shadow inventory, but has anyone measured the MLS inventory that never transacts? There are currently 157 properties on the MLS that have been for sale for more than 180 days. Not to give false hope to the bulls, but if 150 listed properties aren't really for sale, how much inventory do we really have?

Best location in building with breathtaking views of the San Joaquin Nature Preserve and Wetlands, golf course, city lights, along with one of the three pools. This is a rare, private one bedroom and one bath Carlton Arms unit, with a walk-in closet, brand new carpet, granite counter tops, washer, dryer, dishwasher, refrigerator, crown moldings, and additional appliances included. The Watermarke community offers spectacular ammenities boasting three pools and four spas with cabanas, a 24-hour elite fitness center, facialist, masseuse, covered and lighted full-court basketball, ground and roof top tennis courts, and parks with playgrounds. The Clubhouse also offers concierge services, a gourmet kitchen, dry cleaning, sitting areas, an extensive library, custom movie/screening theater room, and business center. A must-see opportunity awaits!

You excluded from the discussion those underwater homedebtors who do not have an agency loan, but do have a conservative 30-year fixed-rate loan(s) that was fully-underwritten. They’ll likely hear the same response from the servicers – “Sorry about your luck, but congrats on your responsible borrowing.”

The only silver lining for people in your circumstances would be if this does reduce the number of foreclosures and perhaps your home value will go back up sooner. Other than than, as a responsible borrower, you will pay much more interest and principal than your spendthrift neighbors, and you will be indirectly paying their debts through banking bailouts.

Next time you see a neighbor towing the HELOC boat behind his shiny new Escalade, reach into your wallet and hand him $100. You are supplementing his irresponsible spending with your money anyway.

I’d rather hand that $100 out to the next street person I encounter, than hand so much as a dime to the pigs who are buried in mortgages they KNEW were far over their heads when they assumed them and want you and me to subsidize their swinish lifestyles.

It breaks my heart to see the most defenseless people in the population, people who are so mentally skewed from congenital mental health problems that they were born with, like schizophrenia, be hacked to pieces on the streets of Chicago, until they finally have had all the abuse and pain they can bear and throw themselves in front of an el train, while I’m forced to subsidize hundreds of thousands of self-indulgent and dishonest swine in mortgages 7,8, or even 10X their incomes that they knew damn well were far over their heads.

We could help these relatively few people who cannot take care of themselves on any terms because of severe mental disability, but we cannot do that and subsidize our middle classes in every indulgence they seem to feel is a God-given entitlement. We can’t give everyone an ideal lifestyle on the taxpayer’s dime and we shouldn’t be trying to.

I had intended to title this “Why you were an idiot to take a 30 fixed loan in 2006” but IR prevailed.

When the principal reductions begin in earnest, my financial advice remains the same as it was when this solution was first suggested: Go long pitchfork and torch manufacturing companies. A “Revulsion Revolution” might start when the Rats and Pigs get their 40% principal haircut while you get squat. I know my next big purchase when my neighbor gets a PR on his BofA loan will be a one way ticket to the banks HQ and demand equality under the law.

I’ll only be able to completely answer that question 5-10 years from now, but the tentative answer is yes.

We weren’t “smart enough” to consider an option-ARM. However, we did consider a 3/1 ARM. Had we chosen that option, the rate in the fixed 3-year initial period would’ve been 75 bps lower, thereby costing us ~$14k less.

Then, the rate would have adjusted downward 200+ bps (on average) over the last year costing us another $8k+. If rates stay lower over the next few years than our 2007-fixed-rate, then we keep multiplying that $8k+ loss every year!

Thankfully the mortgage payments are less than 17% of our gross income…

Congratulations: this is the most outrage-inducing entry in the history of this blog.

I can’t think of anything which pisses me off more than a wave of principal reductions. It might soon be time to face a cruel fact: we who avoided real estate and debt because it wasn’t sensible are the losers. The people who thought that real estate can never go down, and who signed up for as much debt as they could grab, won. Because the government takes care of the stupid.

I feel like an idiot for believing the correct predictions of a crash and selling. I suspect that I should continue to rent for the long term. A smart move might be to jump in now, and figure on more handouts should prices drop further, but I can’t bring myself to sink to that place morally.

I wish I could dump a barrel of disinfectant over every bank manager, loan officer, and realtor in town right now. This is lawlessness.

The idea of principal reductions infuriates me so much that I can’t discuss it with anyone I know without my voice rising uncontrollably, and turning a reasoned discussion into a fight. I’m sorry, I’m just can’t control my rage at being forced to subsidize people who are likely far better off than me to live in over-sized, over-priced houses they can’t afford, while I pay rent and am not offered any breaks on my CC debt.

Worse, I see people on minimum wage struggling to keep a shared roof over their heads while they subsidize the “poor” in Section 8 housing they themselves are too “well off” to qualify for, and are forced also to subsidize well-off middle class people who could live extremely well in good rentals if they were forced out of their overpriced houses by foreclosure.

When do I get to spend my own money for my own purposes? I manage to live very comfortably on an income reduced as my hours and pay were mulceted 40%, but I count every single penny and have cut my expenditures to food from Aldi’s, and to barest repair and replace of necessary clothing. I have no car and use public transit. I refrain from running my A/C until the temp is 95 degrees with the humidity at 80%. If I can adjust, why can’t these people? Fresh cut flowers for the house, meals out at moderate-priced restaurants, new books, and stylish new clothing are all off my menu until I find a better job, yet these people who cannot pay for their houses want principal reductions so they can continue to live the 3000 sq ft house-with-pool-and-4 cars lifestyle. Why should we be forced to enable a few select people to live beyond their means while we get only what we pay for and count every dime that passes through our hands?

I know my next big purchase when my neighbor gets a PR on his BofA loan will be a one way ticket to the banks HQ and demand equality under the law.

Any advice for the renters, SGIP?

I can’t see where there is justice for those who chose to sit this out. I cannot imagine participating in the destruction of property through rioting or vandalism of debtors homes, but if called to judge those who take pitchfork-and-torch action, I will be highly sympathetic to the defendants.

It’s something, I guess, that I still think vigilantism is unacceptable.

Read through the early days of the Revolutionary War. There were quite a few Tory’s that wound up being tarred and feathered. Barbaric? Absolutely. Effective? Yes. Today those people are fondly remembered as “Patriots”.

It’s been said by some that if you put he head of Goldman Sachs in a PMITA prison for 6 weeks, all of this sh..stuff… will stop. It would be nice to test that theory.

I don’t advocate LA Riot style public resistance, but the day is coming where enough pissed people will finally take a stand.

Public resistance can be a peaceful boycott of federal reserve notes and banks via savings accounts.

step 1 = Go to the bank and withdraw most of your money. That’s as nonviolent as it gets. soccer moms do it daily. step 2 = exchanging paper dollars for physical gold and silver bullion. most wont do step 2, for various reasons, but getting people to do step 1 isn’t too much to ask as both the left and right are not so happy with bankers. as people see cash losing value in real terms and gold and silver continue to rise in nominal terms, hopefully more people will make the connection and choose real money over devalued paper dollars.

at this point in the game, this is our only option for effecting change. until we do this en mass, the wealth of our citizens will be siphoned away. and ethan allen is mostly right, few give a sh*t, but once people start to go hungry, they’ll give a sh*t. at that time, the problem will be blamed on something else and .gov will ride to our rescue

I have questions about this strategy even though I have done plenty of it myself – I have $50K in bullion stashed.

The one nice thing about removing your bank deposits is that it contracts the available supply the banks have to lend against. This gives me great pleasure to contemplate.

Once you turn around and exchange the cash for bullion, however, it is deposited into the bullion dealer’s bank account, and is again available to the bank for lending, with all that implies in terms of the economics 101 money supply multiplier effects.

So it seems that bullion is a good choice for hedging against some nasty future situations – particularly currency destruction – but does little or nothing to fight the power of the banks.

The Tea Party is an utter failure, being made up of morons who are easily subverted by neo-feudalists like the Koch Brothers, and by the banker class. Anyone who can honestly believe that some idiot with nominal home ownership by means of a mortgage is somehow a more competent citizen by virtue of the fact that he “owns” property, than a renter who not only lives within his means but may possess a considerable asset base that he doesn’t feel like chancing in the overpriced real estate market, is someone who will believe that the Koch Brothers and Glenn Beck are Jeffersonian idealists.

These people have no concept of individual rights, or what it took to make this country into a nation that fulfills the promise of individual freedom. These fools will not help us restore the freedoms we’ve lost or voluntarily relinquished through the foolish desire to get something for nothing, but will only push this country that much faster into full monty fascism.

Thankfully, the Tea Party is fading fast, now that their real agenda and beliefs are becoming known.

I wouldn’t expect anything else of the banks, and I don’t ask any private for-profit entity to “help” me and am not setting up my own business for philanthropic reasons, either.

I expect fairness and justice on the part of our lawmakers and policymakers, mainly respect for individual rights along with a dedication to upholding the law, and refusal to condone theft by one class of people while setting up another for victimization.